TANGIBLE RESULTS TO RESTRUCTURE
THE POWER SECTOR HAVE NOT BEEN ACHIEVED

KANWAL SALEEM
(feedback@pgeconomist.com)Dec 26, 2011 - Jan 1, 2012

In view of manifold challenges
including energy crisis and dwindling investment, Pakistan's economy needs to
ramp up efforts to carve out a long-term recipe to stimulate growth and reduce
rising unemployment.

The government's performance in the
energy sector is dismal. Tangible results to restructure the power sector have
not been achieved.

The broadening of the tax base is also
one of the biggest challenges the Pakistan economy is facing, as the political
consequences also negatively impact on the economy and people avoid paying taxes
because they want an honest government and some dividends in return.

Experts told Page that fiscal
imbalances are also needed to be addressed. Pakistan needs inclusive growth and
employment generation as well as better distribution of resources and lowering
of poverty rate to ensure equitable benefit to the people, they added.

With current account deficit reached at
$1.6 billion, Pakistan's external account position would not be as good as was
last year mainly because of the difficult global economic situation and Pakistan
has to adopt a policy mix to achieve growth and employment generation, they
said.

The private sector, particularly the
small and medium enterprises (SMEs), needs to have easy access to loans in
commercial banks so that they could play pivotal role in stimulating the growth,
they added.

Since investment requires safe and
transparent regulations, elimination of energy crisis and investment in human
development are inevitable to achieve sustainable and long-term growth, they
said, adding, "the government has to bring about structural and management
changes in the power sector to resolve the long-standing problem because price
changes would not improve the situation."

According to the World Bank's recent
report, titled 'Country Partnership Strategy FY2010-13', Pakistan may have
attained GDP growth rate of 4.5 percent in the current fiscal year (2011-12),
which has been revised downward to 3.5-3.6 percent, by IMF and the ministry of
finance.

Pakistan has been compelled to
downgrade its earlier 4.5 percent growth estimates to 3.5-3.6 percent.

According to the report, if Pakistan is
to have the resources to invest in human development and infrastructure, and if
it is to build resilience to future shocks and guard against costly and
disruptive growth reversals, then raising the ratio of tax-to-GDP (currently
only 10.2 percent of GDP) is absolutely essential.

Also, reforming the power sector and
ensuring sustainable expansion of supplies is absolutely essential if industrial
and service activity is to be increased and productivity raised.

The report says that Pakistan's
medium-term outlook hinges on a significant increase in tax revenues by 2-3
percentage points of GDP by 2012/13.

The report states that the security
situation in Pakistan is precarious, having deteriorated over the past four
years, incurring a large cost to the society.

The government and donors recognise
that the crisis has deep historical roots as well as links to the ongoing
conflict in Afghanistan. The federally administered tribal areas, that is a
focus of ongoing military operations, has long been administered under a
colonial-era legal and governance framework based on tribal structures that
leave it outside of the regular constitutional framework. A patronage tradition
has grown and fuelled grievances that have been exploited by insurgent forces.
Inadequate justice and rule of law, critical components of the provision of
public goods, are seen as integral dimensions of the crisis in FATA and Khyber
Pakthunkhwa.

The report points out that the external
debt-to-exports ratio rose to 220 percent in 2008/09, and is projected to peak
at 273 percent in 2011/12 and start thereafter gradually declining. However,
debt sustainability analysis suggests that external debt service remains
manageable, although there are potential risks to this assessment from sources
such as lower than projected growth and foreign direct investment (FDI), and
higher than projected current account deficit, interest rates and exchange rate
depreciation.

The report further says that a range of
survey evidence confirms Pakistan's governance challenges.

The worldwide 'Governance Indicators'
suggest that Pakistan is at, or below, the 25th percentile on key dimensions of
15 governance indicators, and significantly below the South Asia averages, with
the exception of regulatory quality.

A recent investment climate survey
indicated that governance constraints are critical to the overall business
environment.

Despite improvements in the
business-governance interface, firms' perception of corruption and crime have
worsened. Between 2002 and 2007, the percent of firms citing corruption as a
major constraint to doing business rose from 40 to 57 percent.

Overall, almost half of all firms
reported at least one incident of bribery.

The report says that the priority
lending program amounts to an estimated $3.7 billion (IBRD/IDA) through FY12,
equivalent to about 60 percent of a total potential lending envelope of up to $6
billion during the 4-year CPS period (FY10-13).

International Finance Corporation (IFC)
intends to invest between $1.3 and $1.5 billion, provided that the economic and
security situations do not deteriorate significantly, and will continue with its
robust program of advisory activities. The bank on behalf of development
partners will administer complementary grant financing of at least $100 million
for the MDTF for the northwest border region. This amount may increase depending
on developments in the region and results achieved.

According to the report, tax collection
has failed to improve since the late 1990s, and is among the lowest in the
world. The tax-to-GDP ratio recovered to 10.9 percent in 2006/07, but due to the
economic crisis dropped to 10.2 percent in 2008/09.

Problems in tax collection are related
to administrative limitations and weaknesses in tax policy that have been unduly
responsive to the needs of vested interests.

Tax evasion is rampant, and there is a
vast network of special treatments and exemptions backed up by powerful vested
interests.

Availability of electricity is
currently considered to be the main constraint to economic activity. The sector
faces a large gap between supply and demand, leading to widespread load shedding
and forcing many firms to invest in captive supply.

One in every six firms identifies power
as a major, or severe, obstacle to business, while only 65 percent of households
have access to electricity.

Enhancing domestic revenue mobilisation
will be an urgent priority during the CPS period.

The country still spends only 0.6
percent of its GDP on health sector besides spending on areas that do not
facilitate progress towards millennium development goals (MDGs).

In health, the government is committed
to doubling health expenditures from 0.5 percent of GDP in 2003 to one percent
of GDP by 2013 as envisaged in the Fiscal Responsibility and Debt Limitation Act
(FRDLA), 2005, which provides an indication of the minimum level of public funds
to be allocated to the health sector.

The economic recovery now underway has
opened up the prospect for resumption of international bank for reconstruction
and development (IBRD) lending to Pakistan and the CPS envisages IBRD lending of
up to two billion dollars over the CPS period. The priority lending program
targets IBRD lending of $1.075 billion over FY 10-12. Lending amounts for
FY11-FY13 are indicative and dependent on IBRD's overall lending capacity.

Priorities for IBRD lending are power,
water, ports. IBRD guarantees would also be used to support private investment
in the energy sector.